What is the treatment of GST for petroleum products?

Petroleum products like petrol, diesel, natural gas, and crude oil are significant contributors to India’s revenue. However, these products are excluded from the Goods and Services Tax (GST) framework under specific provisions of the GST laws and constitutional amendments. This exclusion has implications for businesses and consumers alike.

Constitutional Framework

1. Article 246A

Grants concurrent powers to the Union and State legislatures to levy GST. However, petroleum products are kept outside the GST ambit, as decided by the GST Council under Article 279A.

2. Article 265

Ensures no tax is levied or collected except by the authority of law, governing the imposition of taxes on petroleum products.

3. Article 366(12A)

Defines GST as a tax on the supply of goods and services, excluding petroleum products unless notified by the GST Council.

4. Schedule VII (Union and State Lists)

Entry 84 of the Union List allows the central government to impose excise duty on petroleum products.
Entry 54 of the State List empowers states to levy taxes on the sale of petroleum products within their boundaries.

5. Article 279A

Establishes the GST Council, which holds the authority to recommend the inclusion of petroleum products under GST.

Current Taxation Framework for Petroleum Products

1. Outside GST Ambit

Key petroleum products such as petrol, diesel, natural gas, aviation turbine fuel (ATF), and crude oil are not under GST.
These products attract:
- Central Excise Duty: Levied by the central government.
- VAT: Levied by state governments.

2. Products Under GST

Certain by-products and derivatives like lubricants, petroleum jelly, and liquefied petroleum gas (LPG) are taxed under GST, with rates ranging from 5% to 18%.

Challenges of Excluding Petroleum Products from GST

1. Cascading Effect of Taxes

Businesses cannot claim Input Tax Credit (ITC) on petroleum products, leading to increased costs for industries relying on fuel.

2. Dual Taxation

Petroleum products face excise duty at the central level and VAT at the state level, leading to a higher overall tax burden.

3. Revenue Dependence

States and the central government rely heavily on revenue from petroleum products, making it politically challenging to bring these under GST.

Prospects for Inclusion Under GST

1. GST Council Recommendations

As per Section 9(2) of the CGST Act, 2017, petroleum products may be included under GST when recommended by the GST Council.
Inclusion could reduce the tax burden on industries and promote uniformity in taxation.

2. Potential GST Rates

Proposed GST rates for petroleum products are likely to be in the 18% to 28% range. However, this would require adjustments to compensate states for revenue losses.

Impact of Exclusion on Key Stakeholders

1. Industries

Sectors like manufacturing, logistics, and aviation bear higher costs due to the inability to claim ITC on fuel purchases.

2. Consumers

Exclusion results in higher fuel prices, directly impacting transportation and goods costs.

3. Government

Both central and state governments benefit from higher revenue collection through excise duty and VAT, offsetting revenue loss from GST implementation.

Landmark Cases Related to Petroleum Products and Taxation

**1. Union of India v. Mohit Minerals Pvt. Ltd. (2022)**

Issue: GST applicability on imported natural gas under reverse charge mechanism.
Judgment: Supreme Court ruled that GST is applicable on imports of liquefied natural gas (LNG), clarifying the scope of taxation on petroleum derivatives.

**2. Reliance Industries Ltd. v. State of Gujarat (2021)**

Issue: Applicability of VAT and CST on petroleum products for inter-state trade.
Judgment: Gujarat High Court emphasized that petroleum products remain under VAT/CST until included under GST.

**3. ONGC Ltd. v. Commissioner of GST (2020)**

Issue: ITC claims on services linked to petroleum exploration.
Judgment: Tribunal clarified that ITC is not available for non-GST petroleum products, leading to higher compliance costs for oil exploration companies.

**4. Indian Oil Corporation v. Union of India (2021)**

Issue: GST on petroleum by-products.
Judgment: The court ruled that by-products like lubricants are taxable under GST, distinguishing them from crude oil and fuels.

**5. M/s Bharat Petroleum Corporation Ltd. v. State of Kerala (2022)**

Issue: VAT applicability on petroleum trade during transitional GST periods.
Judgment: Kerala High Court upheld the validity of VAT for petroleum products despite the GST rollout.

Conclusion

Under the CGST Act, 2017, petroleum products remain outside the GST framework, governed instead by the Excise Duty Act and state VAT laws. This dual taxation system is protected by Article 246A and Article 279A, giving the GST Council the power to recommend changes. While landmark cases like Reliance Industries and ONGC Ltd. have clarified existing laws, the inclusion of petroleum products under GST could simplify taxation, reduce costs, and promote industrial growth. However, political and fiscal considerations continue to delay this transition.